D. Bryan Thomas and Kyle M. Doiron | Buildsmart
After a number of controversial bills proposed from various industry groups over the last few years, the Tennessee construction community came together in 2020 to push through legislation intended to protect members of the construction industry. A cornerstone of that attempt was gaining lien priority – or at least parity – with construction lenders, further bolstering the trust fund statutes, and developing statutory stop work procedures in the event of non-payment. As with most legislation, there were a few changes made along the way that were necessary to pass the bill into law. Those changes eliminated some of the proposed protections – including lien parity or priority – and created some unintended wrinkles.
The new amendments arguably apply to most, if not all, ongoing projects. Specifically, they apply to any contract (or subsequent change order) executed after July 1, 2020 (“applies to actions occurring and contracts entered into, amended, or renewed on or after that date”). A practical summary of changes is shown below.
Prompt Payment Act:
- Retainage – The Tennessee Retainage Act already provides protections and incentives to protect the construction community. Thus, with two notable exceptions, no real changes were made. Those exceptions were:
a. Public entities are no longer subject to any penalties for failing to comply with Tennessee retainage requirements. It is unclear whether a public entity is still obligated to comply with the obligations and establish an interest-bearing escrow account to hold the project retainage or practically if they will do so. While the amendment releases the public entities from retainage act penalties, it does not expressly release all the other participants on a public project who may still be subject to the statutory requirements for any retainage being withheld and the potential $300 per day penalty. While time will tell how a court will interpret the revision, any contractor holding retainage on a public project should verify the creation of a compliant account at the owner level and obtain written confirmation from the public entity. Absent confirmation, a contractor should strongly consider independently creating a compliant interest-bearing escrow account to hold any retainage.
b. Language was added to protect escrow agents holding the retainage to make it easier to create proper retainage escrow accounts: “Relief may not be sought against the person holding the retainage as the escrow agent, and that person bears no liability for the nonpayment of the retainage.” The statute still provides authority for the court to order the person holding the retainage to pay it into trust.
- Trust Fund Enhancements – The Tennessee statutes already require funds received or committed for construction projects to be held in trust. The new amendment makes clear that neither insolvency nor bankruptcy excuse a failure to comply with the requirements.
- Demand for Reasonable Assurances – Another paramount concern of the construction industry efforts was to address projects that lose funding or have funding issues after the execution of the contract or commencement of the project. Thus, a statutory requirement has been added upon the demand by a prime or remote contractor for an owner to provide “reasonable evidence” within 10 days that it has adequate funding for the project. In addition, the owner is prohibited from “materially vary[ing]” the financial arrangement without notifying the entity that previously requested the assurance. The amendment also adds a statutorily approved form for the demand for reasonable assurance (see TCA 66-34-603(a)(5)). Notably, there is not a statutory remedy if the owner fails to provide adequate assurance, but a court may consider the owner’s failure as an anticipatory breach.
- Right to Stop Work Procedure – While the enhancement of the trust fund statutes and lien priority protection did not make the final bill, a clear procedure on the right to stop work did. The language in the new amendment for the right to stop work is built around the question of whether the party withholding payment provides “adequate legal reasons.” Thus, the new “right” is really a formalized procedure rather than a new right. Contractors must understand that courts will likely still require a contractor to prove a material breach before stopping work – if the nonpaying party responds to the notice with some excuse that could be considered “adequate legal reasons.” Thus, the new procedure gives a contractor a clear right to stop work in certain situations, but contractors must remember it is not an absolute right. Instead, stopping work can have grave consequences for the project and expose a contractor to significant liability, so any decision to stop work should still be approached with significant caution.
- Increased Interest – To give the Prompt Payment Act some real teeth, interest has been increased to 1.5% per month.
- New User-Friendly Demand Form – One of the concerns that was continually expressed was the need for a simple demand form when payment was overdue, without the need for counsel or proceeding with a Notice of Nonpayment or Notice of Lien under the lien statutes. As a result, there is now a statutory form (see 66-34-602(a)(5)).
Lien Laws/Truth in Construction Act:
- Pre-work Lien Notice: Commercial Project – This was technically required under the old law on all commercial projects pursuant to the Truth in Construction Act. However, it did not have any real teeth, so it was universally ignored by the construction community. Practically, a lack of notice has not been a real issue on commercial projects, particularly with the notice of nonpayment requirements for remote contractors that exists under the lien law. Thus, the new amendment eliminates the pre-work lien notice for commercial projects.
- Pre-work Lien Notice: Residential Project – The area where issues and confusion appeared to exist was in the residential markets where there were less sophisticated owners. Thus, the new amendment now requires a prime contractor to provide notice to the owner on a residential project and provide the form for doing so (see 66-11-203).
- Lien Waivers – Pre-work contractual lien waivers were already unenforceable under Tennessee law. Now, with the amendment, a party that continually attempts to use them is subject to the jurisdiction and disciplinary action from the licensing board and exposes itself to payment of attorneys’ fees.
- Final Lien Waiver – The form of the final lien waiver that is required from the prime contractor under the Truth in Construction Act has been modified (see 66-11-205). While the failure is a class B misdemeanor, failure to provide the waiver continues to have very minor consequences.
Time Limitations
- Statute of Repose – The statutes generally remain the same with the four-year (with the potential extension to a fifth) statute of repose ending all legal actions relating to construction either four or five years after substantial completion. The problem was that there was confusion as to whether the statute of repose applied in arbitrations, with at least one arbitral tribunal allowing a plaintiff to proceed on an older claim because it did not believe the statute of repose applied beyond the court room. The amendment makes clear that the statutes of limitation and repose are to apply in arbitration as well. Similar tweaks were made throughout the construction-related statutes to clarify the intent even further.
- Statute of Limitations – While most construction-related actions are limited by the statute of repose, there are some claims that can expire sooner based on a variety of statutes of limitation. Notably, after some discussion, similar amendments were not made to the various statutes of limitation to clarify whether or not those statutes of limitation are intended to apply to arbitrations.